Shell has agreed a £47bn offer for BG Group, the UK’s third-largest energy company, which was created in 1997 when British Gas split into BG and Centrica.
Here is what analysts made of the deal, which will create and oil and gas business worth more than £200bn. Several believe this could spark a deal frenzy.
Matthew Beesley, head of global equities at Henderson Global Investors
Shell’s agreed purchased of BG Group (not to be confused with British Gas, owned by the utility company Centrica), is important for all UK pension savers. Prior to today’s announcement, Shell accounted for nearly 10% of UK related dividend income. The purchase of their rival BG, will increase this to nearer 11%. But so what?
Well in making this acquisition, Shell will be taking on a portfolio of potentially riskier assets. BG shares had fallen by nearly a third in the last year prior to today’s announcement, as the company’s exposure to a series of troubled projects in Brazil and costs associated with the launch of a new Liquefied Natural Gas (or LNG) project in Australia weighed on the shares.
Shell is taking on more risk and in issuing more shares and also in paying out cash to BG shareholders. As a result their balance sheet will become more stretched. And this potentially puts some strain on this dividend as they redirect cashflows to paying down debt ahead of growing the dividend.
The company has emphasised that this year’s dividend will be unchanged and that it could grow in 2016, but for UK pension investors, we need to be aware that 17% of UK FTSE All Share income is oil and gas related.
We think Shell’s acquisition of BG will likely be viewed as strategically smart and opportune, but should oil prices stay lower for longer, while it will be good for the UK consumer, it could put pressure on UK dividends and be detrimental to UK pension investors.
Michael Clark, portfolio manager of the Fidelity MoneyBuilder Dividend Fund
The acquisition of BG by Shell has occurred for two main reasons. First, although BG had some first class assets, it has struggled to develop them as smoothly as hoped in recent years. Shell has a wider pool of expertise and substantially greater access to investment capital. Second, this gives Shell a presence in the productive zone off the coast of Brazil, and will ensure that Shell’s own production is maintained over the medium term, taking away the requirement to make large discoveries to offset natural depletion. It’s a good deal for BG shareholders, clearly, but also good for shareholders in Royal Dutch Shell. There is no danger that Shell will change its dividend policy.
Pascal Menges, manager of the Lombard Odier Global Energy Fund
This shows that big oil’s growth strategy over the last ten years is bust. Having bet enormous sums on eye-wateringly expensive oil production from oil sands, ultra-deep water and arctic fields the supermajors are now ill-placed to cope with a low oil price.
What next? Shell’s purchase of BG Group heralds a scramble by big oil to “high grade” – improve the overall quality of – their portfolios. It didn’t have to be this way. Low oil prices in the early 2000s offered a window to pick up quality reserves and production at depressed prices. Instead they sat on their hands and waited until later in the decade to embark on pricey investments in new oil sources.
With BG Group, Shell gets exposure to Brazil’s vast Santos basin reserves, and further involvement in the integrated gas (LNG) market. But it comes at a hefty price. Management will have their work cut out to execute the deal and generate synergies and assets sales. The risk of indigestion is not small.
Will other oil majors take the same route? They’d certainly like to high grade their portfolios. Only Exxon has the flexibility to do big ticket deals like BG Group. In contrast Total, ENI and Statoil will have to content themselves with the pick ‘n mix counter.
Marc Kimsey, senior trader at Accendo Markets
The deal between Royal Dutch Shell and BG Group will prompt sector consolidation. The decline in oil price over the past year has battered some stocks which are clearly now looking attractive.
In the last year BG shares fell 30%, shares in Tullow Oil have fallen 65%, Premier Oil down 55%, and Petrofac down 20%. By comparison, sector behemoths BP and Royal Dutch Shell have only shed 10% over the same period leaving them in the position of predator rather than prey.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers
Whether precipitated by the falling oil price or BG’s more recent production woes, Shell has acted opportunistically, as it previously implied it might if the occasion arose.
Already the largest FTSE 100 constituent by a considerable margin, this deal will further consolidate Shell’s position in that regard. There are clear attractions from Shell’s viewpoint, including its additional exposure to liquified natural gas, almost immediate cost synergies and, in due course, asset sales from a partial break up of BG’s operations.
The projected price being paid for BG does not quite match the company’s previous high of 1551p in March 2011, since when the shares have fallen 41%, 20% of which is in the last year alone. Nonetheless, the combined cash and shares offer will not, it would appear, dilute the cash generative abilities of the combined entity, with a substantial share buyback programme pencilled in for 2017 and beyond.
In terms of the energy sector itself, the deal could also prompt other companies who have been running the slide rule over potential targets to make their move.
Biraj Borkhataria, analyst at RBC Capital Markets
The key attractions for Shell are BG’s deepwater assets in Brazil and its liquefied natural gas (LNG) portfolio. BG’s LNG portfolio combined with Shell’s would represent c40mtpa or roughly 16% of the global LNG market, further propelling Shell’s position as a leader in this area. In addition, Shell would acquire significant growth options including Tanzania and Lake Charles LNG. In Brazil, BG’s assets would give Shell a further foothold in one of the lowest cost basins in the world, and could add potential synergies with Shell’s Libra assets.
Michael Hewson, chief market analyst at CMC Markets
This morning’s news ... has given the beleaguered oil and gas sector a much needed shot in the arm after 18 months of significant underperformance.
While the size of the deal is certainly noteworthy, it’s the second biggest deal of its kind, behind the 1998 Exxon Mobil tie up, it also speaks to the damage the sharp decline in the oil price has done to a number of big oil players in the last few months, making the sector ripe for consolidation.
It also raises expectations as to which other companies could also come into play as the oil and gas sector gears up for further consolidation, with speculation surrounding Tullow Oil, whose shares have lost 60% since the beginning of 2014 and BP.
The last time we saw deals of this size was in 1998 when Exxon and Mobil merged at a cost of $73bn and BP bought Amoco for $48.2bn.
We’ve seen the oilfield services sector start the ball rolling at the end of last year with US company Halliburton announcing it was merging with US rival Baker Hughes, with a price tag of $34bn.
In the last 12 months, the oil majors have had to deal with the consequences of events in Ukraine and the Crimea as well as western government sanctions on Russia and the effects these sanctions have had on the profitability of their assets exposed to those sanctions.
Early last year, Royal Dutch Shell’s CEO, Ben Van Buerden, announced a significant sharper focus on costs and unnecessary capital expenditure. The company also warned on profits for the first time in a decade...
The company’s most recent numbers were encouraging, showing that cashflow had improved by 11% and earnings were up 14%, suggesting that Van Beurden’s strategy of targeted cost cutting appeared to be bearing fruit, despite the lower oil price.
This does appear to be reflected in the share price performance since the beginning of 2014, which shows that Royal Dutch Shell is among the better performers in the sector, in stark contrast to its target BG Group.
It would appear that Shell is looking at BG Group’s LNG assets as it looks to diversify further away from its core oil business, at a time when new exploration for both oil and gas is becoming increasingly expensive in terms of cost versus returns.
Given that BG Group is one of the world leaders in LNG and recently completed a $20bn facility in Australia, the acquisition here could well draw a line under a turbulent time for BG Group which has struggled with management uncertainty over the last 18 months, and in the process given shareholders a rather torrid time.
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